Compare retirement plan structures using your workforce, funding capacity and administrative needs, with a practical example of planning for growth.
January 22, 2024 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of January 22, 2024.
Choosing a retirement plan can feel like comparing products with very similar names and very different price tags. An owner may start by asking how much can be saved personally, while the person handling payroll worries about the work of running the plan. Both questions matter, but neither is enough to choose a design for the business.
Start with the workforce, the contribution you can sustain and what you want the benefit to accomplish. A plan that fits an owner-only practice may become expensive or administratively unsuitable after employees join. The useful comparison is the total arrangement, including the promises made to employees and the responsibilities that continue after the paperwork is signed.
Start with the people the plan must cover
Build a basic employee census before requesting proposals. Include owners, employees, compensation, age and service information, along with related businesses that may affect the analysis. Have the provider determine the applicable eligibility and coverage rules rather than assuming separate companies or part-time schedules settle the question.
An owner without employees may have options that operate differently once staff become eligible. A partnership also needs a coordinated approach; partners shouldn't simply assume each can establish an unrelated owner-only plan for the same business income.
Next, identify the benefit's purpose. Are you trying to help employees save through payroll, provide an employer-funded benefit, strengthen an offer to experienced candidates or support a substantial owner retirement contribution? More than one objective may apply, but deciding which matters most makes the proposals easier to evaluate.
Compare who contributes and what the employer commits
A SEP generally uses employer contributions to employees' individual retirement accounts. Its appeal can include a simpler administrative structure, but the contribution obligation for eligible employees belongs in the cost comparison. A large desired owner contribution should never be evaluated in isolation from that workforce cost.
A SIMPLE IRA combines employee salary-reduction contributions with required employer contributions under its rules. It may fit an eligible smaller employer seeking a relatively straightforward payroll savings benefit. The employer should understand the required funding and restrictions before choosing it merely because its name sounds uncomplicated.
A 401(k) can offer more design choices, but those choices come with plan documents, payroll coordination, testing or applicable exceptions, reporting and ongoing oversight. Ask how a proposed match, nonelective contribution or safe harbor provision changes both cost and administration. “More flexible” does not mean every feature can be changed whenever the employer wishes.
These are starting distinctions, not complete eligibility tests. The IRS small-business retirement-plan guidance explains the underlying structures. Current-year provisions and deadlines require a separate review before adoption.[1]
Put the options through the same business example
Consider a hypothetical service firm with an owner and eight employees. The owner wants a meaningful retirement benefit and has identified $30,000 as a preliminary annual employer budget. That figure is an assumption for comparison, not an estimate of what any particular plan would cost.
The firm asks providers to model the same census under each suitable arrangement. One proposal may produce a lower administrative bill but require larger employer contributions for eligible employees than expected. Another may have higher administrative expenses while better matching the firm's goal of encouraging payroll saving.
The owner should compare the employer's contributions, provider charges, payroll work and implementation demands separately. Costs paid by participants should remain visible, too. Moving a charge from the employer to employees changes who pays it; it doesn't make the charge disappear.
Suppose the first proposal includes $23,000 in employer contributions and $5,000 in administration, using $28,000 of the $30,000 budget. A second proposal has $26,000 in employer contributions and $3,000 in administration, totaling $29,000. The second has the lower administrative bill, but costs the employer $1,000 more overall. These invented amounts illustrate a cost comparison; they are not permissible contribution calculations for an unspecified census.
If an anticipated hire adds $3,500 to the first proposal, its total becomes $31,500, exceeding the budget by $1,500. The owner must adjust the budget or obtain a different lawful design before committing. Also compare what employees receive: the two proposals do not necessarily deliver equal benefits just because their totals are close.
That comparison gives the owner something more useful than a list of contribution limits: a view of how the benefit behaves as the business changes.
Keep a pension proposal in its own category
A cash balance plan is a defined benefit pension arrangement, even though its benefit is described using an account-like format. It requires a different funding analysis from a defined contribution plan such as a 401(k). An actuary's work and the employer's ability to sustain funding are central to the decision.[2]
For an established practice with dependable cash flow, it may deserve consideration alongside another plan. For a business still trying to predict next quarter's payroll, the funding commitment may be a poor fit. A potential deduction is useful only within a design the employer can afford and administer.
Choose an oversight process with the plan
The business decision to establish a benefit differs from fiduciary decisions involved in operating an applicable plan. Where fiduciary duties apply, owners and other responsible people need a prudent process for selecting and monitoring providers, evaluating reasonable fees and acting for participants. Outsourcing tasks does not automatically remove every responsibility.[3]
Name the person who will reconcile payroll, the person who will review provider reports and the person who can approve changes. Ask providers to explain their roles in writing, including which decisions remain with the employer and how unresolved problems will be escalated. A recurring review can identify missed service commitments before they become a pattern.
Begin with a census and a realistic funding range. Ask for comparable proposals, then document why the chosen arrangement fits the workforce and business. Over time, assess participation, employee understanding, service problems and total cost. Those observations can guide improvement without assuming that simply offering a plan will guarantee retention.
Related reading
- Solo 401(k) or SEP IRA: Start With How You Earn Your Income
- A Match and a Nonelective Contribution Do Different Jobs
Have more questions about choosing a retirement plan for your business? Email Dave at dave@financialforte.com to discuss your questions and next steps.
The contact invitation is current; it does not imply this contact path existed on the historical reference date.
Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
